Risking Our Future Middle Class:

Young Americans Need Financial Reform

Young adults have an enormous stake in the financial regulatory reform debate. They
have paid a high price for a banking crisis caused by lax regulation, and their economic
futures will depend on rebuilding strong public structures for financial regulation going
forward. This briefing paper addresses some of the key reforms and the impact of both the
banking crisis and unregulated lending practices on young Americans’ financial futures.

The Deregulatory Roots of the Financial Crisis

Today’s young adults have come of age during an era when anti-regulation ideology has
held sway in Washington and on Wall Street. Over the past thirty years, government
officials have steadily dismantled key financial sector protections that together were
responsible for the longest financial crisis-free period in America’s history. As a result
of this trend away from regulation, complex financial products such as nontraditional
mortgages and exotic derivatives flourished in the consumer and investor markets,
creating record profits and bonuses for financial insiders—but putting our economy at
tremendous risk.

The subprime mortgage crisis began in the early 1990s when unregulated predatory
lenders targeted working-class communities. It spread in the 2000s as lenders discovered
the profitability of pushing complex mortgages across the market. The crisis went global
as regulatory changes in the late 1990s allowed the same financial giants that were
funding risky home loans to flood the market with hundreds of trillions of dollars in
derivatives—essentially, bets on risk. A weakening of our public regulatory structure
allowed for each of these developments.

Young Americans and the Financial Crisis

The result of this failed experiment in deregulation was a financial meltdown that has
cost Americans $11 trillion in family wealth, $14 trillion in taxpayer bailouts and over
8 million jobs. Yet even before the crisis hit Wall Street, deregulated lending practices
created a crisis on Main Street, with sharp increases in Americans of all ages facing high
debt payments, bankruptcies and foreclosures over the past 20 years. Young Americans
in particular, however, can expect lasting damage from both the financial sector crisis
and the personal finance crisis in the areas of jobs, education, and indebtedness.

Jobs:
Average Unemployment Rate for 2009 3

24.3%
The widely-reported jobs crisis during the Great
Recession has hit Depression-era levels for
America’s young adults. Fully 37 percent of 18–
to 29-year-olds are unemployed or involuntarily 14.7%
out of the workforce, the highest share among
this age group in more than three decades.1 Such
a bad start can have a lasting impact. A recent 8.3%

study shows that even fifteen years after college

graduation, wages are still lower for those who
entered the labor market when unemployment
was high.2 16-19
yrs old
20-24
yrs old
25-54
yrs old
Education:
With jobs scarce, continued education should be a refuge for young workers. Unfortunately, the decades-
long disinvestment in higher education funding has left states unable to support school systems just when
students are in the greatest need of aid. The financial crisis has also created a fiscal crisis in the states,
resulting in further dramatic cuts to education funding. In the face of plummeting tax revenues, at least
39 states have implemented cuts to public colleges and universities and/or made large increases in college
tuition to make up for insufficient state funding.4 For example, the Arizona Board of Regents approved
statewide tuition increases for 2010–11 that will raise tuition at Arizona State University nearly 20 percent
overall for incoming students and about 13 percent for continuing in-state students.5 The decision by
the University of California Board of Regents to increase student fees by 32 percent was met with angry
protests by students.6

Debt:
Young Americans have come of financial age in an era of abundant but expensive credit thanks to
deregulation of consumer financial services over the past 20 years. As students, workers and young parents,
this generation faces the difficult combination of low wages and benefits, high costs and high debt levels.
Debt has become a generation-defining characteristic for today’s young adults.

• Credit cards:  Today’s 20–and 30–somethings are relying more on credit cards to cover basic living
expenses, particularly during those first few years in the workplace. Roughly half of households
headed by someone under 35 carry a credit card balance.7 In recent years, credit card companies
have made common use of gotcha tactics like jacking up interest rates at any time for any reason,
charging interest this month for last month’s balances, and applying payments to the lowest-interest
balance first to maximize finance charges. Congress has enacted legislation to ban a number of these
outrageous tactics—the new law also puts curbs on soliciting borrowers under 21 and colluding with
universities to market to students—but credit card lenders have already begun to alter contracts to
get around the new rules.
• Private student loans:  Graduates with onerous debt find their career options constrained and their
ability to save for basic needs such as retirement and the creation of a family greatly undermined
by debt payments. Indeed, 20 percent of students who take out loans do not graduate, leaving
them without the benefit of a college degree and with the burden of a student loan.8 This burden is
especially heavy for those who take out private (nonfederal) student loans, which are generally more
expensive and offer few borrower protections in comparison to federal student loans. With variable
interest rates as high as 19 percent in recent years, private loans can be as expensive and ill-advised as
putting tuition on a credit card.9 Still, due to aggressive marketing and a lack of regulation, nearly 3
million American students took out private loans in 2007–08, up from less than 1 million just four
years earlier.10 America’s students have taken out $120 billion in private loans over the past decade.11
Between 2003–04 and 2007–08, the percentage of African-American undergraduates who took out
private loans quadrupled from 4 percent to 17 percent, making them the most likely group to take
out pricey, dangerous private loans.12
• Mortgages:  The housing bubble drove the price of the quintessential “starter home” out of reach
for millions of young adults. Nationally, housing prices nearly doubled from January of 2000 to the
summer of 2006.13 The 37 percent of young adults who went into debt to afford a home14, however,
were as vulnerable as other Americans to the deceptive and abusive mortgage lending practices that
flourished due to poor regulation.
 • Auto Loans: In most parts of the country, a car is an essential purchase—and for young people, the
highest-priced asset they own. Forty-one percent of younger households have auto loans.15 However,
the auto lending market is plagued by well-documented deceptive practices. Today, a majority of auto
dealer profits are derived not from the car itself, but rather from the financing and add-ons in car sale
transactions.16 Consequently, dealers often engage in deceptive practices such as falsification of loan
applications, discretionary interest rate markups and bait-and switch (or “yo-yo”) financing where
the dealer promises one rate but ultimately charges a much higher rate. Yo-yo financing impacts an
estimated 1 in 4 borrowers with incomes below $25,000, costing borrowers an average of 5 percent
higher interest on their car loans.17 Dealer markups cost consumers $20 billion every year.18

The Solution: Strong Financial Reform for a Strong Future Middle Class
Young adults are paying a stiff price for the economic havoc wreaked by Wall Street. The thirty-year campaign
against even the most basic forms of government regulation has drastically dismantled the rules that once
ensured dynamic, competitive financial markets. A return to economic stability and accountability is important
for young people not only for their immediate economic livelihood but to guarantee that America has a future
middle class.

Consumer Financial Protection

The proposed Consumer Financial Protection Agency will be the public structure that helps guarantee fair and
transparent loans for young adults’ schooling, first homes and business ventures. These tools are essential for
young adults establishing their independence and starting a family. But getting on your feet can be a treacherous
climb when the tools you rely on have been designed to drag you down.

Restoring basic fairness to consumer finance is critical for the next generation of savers and homeowners. The
financial reform legislation before Congress would create a Consumer Financial Protection Agency (CFPA),
a new watchdog that would be the first government entity whose primary mission is to protect the economic
wellbeing of ordinary Americans. The CFPA would have jurisdiction to block deceptive credit card terms,
require student lenders to follow fair rules of the road, require mortgage brokers to take steps to offer borrowers
loans they can afford, and let first-time car buyers put their money toward vehicles instead of excessive interest
rate payments.

Young people also deserve a strong, independent Consumer Financial Protection Agency that is responsible for
setting and enforcing clear rules across the financial marketplace.  Congress must be careful not to undermine
the independence of the consumer protection agency, or to exclude from its oversight any purveyor of financial
products. If Congress enacts a strong Consumer Financial Protection Agency, young Americans stand to benefit
from more disclosure and fairer pricing.

Safeguarding the Financial Sector from Excessive Risk-Taking

In order to pave the way to economic security for the next generation, we need to establish integrity in the
financial markets and facilitate productive economic activity that benefits all segments of our communities. The
financial sector is supposed to be the economic engine that drives the creation of good jobs for new entrants to
the workplace, supports security in saving for a home or retirement, provides the goods and services that young
people need and want, and is sustainable over the long-term.
The current financial crisis is the natural and logical result of a failed financial regulatory system that placed an
irrational faith in the ability of markets to self-correct. As a result, regulators ignored repeated warnings about
the amount and types of risk being taken on by financial institutions and the general movement of financial
activity into increasingly complex and opaque forms. New reforms must give bank regulators the ability to
identify and cure risks that could threaten the broader financial system. Central to that goal is bringing the
activity of the unregulated “shadow markets” into the light. Complex financial products like derivatives are
traded in secret instead of in an open market like the stock market, hiding the scope of the associated risk.
The derivatives market is more than 30 times U.S. GDP, and more than 8 times the size of the “regular” credit
markets.19  As long as derivatives are unregulated, the bulk of our financial system is unregulated. Equally
important is the authority to manage the failures of large institutions in a way that neither disrupts the entire
economy nor requires the massive infusion of taxpayer dollars we saw in the recent bailouts.

The financial meltdown has shown us that incentive structures on Wall Street encouraged excessive speculation
and short‐term executive payouts over long‐term growth and stability. Even worse, the ability of both federal
overseers and shareholders to influence bank practices has been depleted. A reinvigorated Securities and Exchange
Commission, equipped to fully carry out its mission of oversight of the markets and financial professionals, is
needed to protect the interests of investors at every level. As owners of publicly traded companies, shareholders
must be given an active role in the election of corporate boards and establishment of compensation policy, as
well as the legal means to take action against financial fraud and abuse.

Conclusion
Legislation to overhaul the financial sector faces fierce opposition from banking industry lobbyists and the
powerful U.S. Chamber of Commerce. But America’s young people deserve clear rules and strong enforcement.
New policies must work to maximize the potential for young people–espe­cially for those from less advantaged
financial backgrounds and young people of color–to complete their educations, obtain decent jobs when they
enter the labor market, and to save and build assets for the future.

It should be our shared responsibility to help America’s youth build a strong foundation for the future. That
means creating the regulatory framework that brings transparency and accountability to financial markets and
enables us to foresee and manage future crises. As taxpayers and future stewards of the national debt, young
Americans have a keen interest in avoiding multi-trillion-dollar bailouts to cover the irresponsibility of our
largest banks and financial institutions. We cannot wait any longer for real financial reform.
Endnotes

1. Pew Research Center, “MILLENNIALS: A Portrait of Generation Next,” February 2010

2. Kahn, Lisa. “The Long-Term Labor Market Consequences of Graduating from College in a Bad Economy.” Working
Paper, electronic version. (2008) Yale School of Management. 12 June 2009. The 15-year effect is an average 2.5 percent
decline in wages for each extra percentage point in the unemployment rate.

3. Bureau of Labor Statistics, “Employment status of the civilian noninstitutional population by age, sex, and race,” 2008

4. Center on Budget and Policy Priorities, “An Update on State Budget Cuts,” March 8, 2010

5. StatePress.com, 3/11/10

6. LA Times, 11/19/09

7. Federal Reserve, “Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances”

8. Viany Orozco, Dēmos, “Student Debt 101: Why College Students Are Burdened by Debt and What To Do About It,”
March 8, 2010

9. National Consumer Law Center, “Paying the Price: The High Cost of Private Student Loans and the Dangers for
Student Borrowers,” March 2008

10. The Project on Student Debt, “Private Loans: Facts and Trends,” August 2009

11. Calculations by Demos on data from The College Board, “Trends in College Aid 2009,” Table 2 (http://www.trends-
collegeboard.com/student_aid/1_1_total_aid_c.html?expandable=1)

12. The Project on Student Debt, “Private Loans: Facts and Trends,” August 2009

13. Standard & Poor’s, “S&P/Case-Shiller Home Price Indices 2008, A Year In Review,” January 13, 2009

14. Federal Reserve, “Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances”

15. Federal Reserve, “Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances”

16. 2009 F&I Statistics, F&I Management & Technology, December 30, 2008, at 28, stating that more than half of total
profits are derived from finance and insurance.

17. Testimony of Michael Calhoun, Center for Responsible Lending, before House Financial Services Committee,
September 30, 2009

18. Center for Responsible Lending, “Auto Dealers’ Lending Abuses Cost Billions,” November 2009

19. Testimony of Robert A. Johnson, Director of Economic Policy, The Roosevelt Institute, Before the U.S. House of
Representatives Committee on Financial Services Hearing on Reform of the Over-the-Counter Derivative Market:
Limiting Risk and Ensuring Fairness, October 7, 2009